Using a property company to save tax is a good idea in theory but only if it suits your individual circumstances. Depending on your objectives it may in fact turn out to be poor tax planning.

I’ve noticed a trend in recent years for property trainers, in particular, to push ownership of residential properties in limited companies without truly understanding the pros and cons. These individuals may be smart property investors but they are not tax experts, so they don’t know what they don’t know. Therein lies the danger.

As a property owner, you might be considering transferring your property into a limited company to take advantage of certain tax benefits. However, before making any decisions, it’s important to understand the tax advantages and disadvantages of this move. In this blog, I’ll discuss the key tax implications of transferring property into a limited company.

Tax advantages of transferring property into a limited company

1. Lower tax rates: Limited companies are taxed at a lower rate than individuals, with the current rate being 25%. This is significantly lower than the additional rate of Income Tax for individuals, which is currently 45%. However, the Corporation Tax rate has recently risen from 19% to 25% (it remains at 19% if profits are less than £50,000) which is a swingeing increase of more than 30%. Don’t rule out further Corporation Tax increases over the next few years.
2. Tax deductible expenses: As a limited company, you can deduct certain expenses from your taxable profits, such as mortgage interest payments, repairs, and maintenance costs in full. For example, mortgage interest qualifies for full tax relief in a limited company but only basic rate tax relief may be claimed on a buy-to-let mortgage for an individual. This can reduce your overall tax liability.
3. Inheritance Tax planning: Transferring your property into a limited company can help with Inheritance Tax planning but only if your company is classed as a trading company rather than an investment company. When a property is owned by a company, the value of the shares in the company can be passed down to heirs, rather than the property itself. This can potentially help reduce the Inheritance Tax liability for your heirs.
4. Capital Gains Tax: When you transfer a property into a limited company, you may be able to take advantage of lower Capital Gains Tax rates. This is because capital gains tax is based on the sale price of the shares in the company, rather than the value of the property itself. Also, it is possible to transfer property into a limited company and avoid CGT on the transfer subject to certain qualifying conditions.

Tax disadvantages of transferring property into a limited company

1. Stamp duty land tax: When you transfer a property into a limited company, you may be subject to Stamp Duty Land Tax (SDLT). This is a tax on the transfer of land or property and is based on the value of the property being transferred. The rates of SDLT can be significant, particularly for properties valued over £500,000. It is possible to avoid SDLT on this transfer but again only under certain qualifying conditions.
2. Capital Gains Tax: While transferring a property into a limited company may help reduce your Capital Gains Tax liability in the long term, there may be a significant upfront Capital Gains Tax liability when the property is transferred. This is because Capital Gains Tax is based on the market value of the property at the time of transfer. Remember CGT can be potentially avoided under certain qualifying conditions.
3. Additional administrative burden: Running a limited company comes with additional administrative responsibilities, such as filing annual accounts and Tax Returns. This can be time-consuming and may require the services of an accountant, which can increase costs.
4. Loss of personal ownership: When you transfer a property into a limited company, you lose personal ownership of the property. This means that you no longer have the flexibility to use the property for personal purposes, such as a holiday home.
5. Double Taxation: If you want to sell a property in a company and use the money personally you pay double taxation! Your company pays Corporation Tax on the capital gain then you pay personal tax again when you withdraw the money from the company.

Conclusion

Transferring a property into a limited company can offer several tax advantages, such as potentially lower tax rates, more tax-deductible expenses, and potential Inheritance Tax planning opportunities. However, there are also tax disadvantages to consider, such as possible stamp duty land tax, potential upfront Capital Gains Tax liabilities, additional administrative burdens, the loss of personal ownership and possible double taxation. It’s important to consider these factors carefully before making a decision.

Sometimes it is better to invest in your personal name if that is a more tax-efficient solution for you based on your own individual circumstances. Property taxation advice is definitely not a one-size fits all solution. It is very much bespoke.

It’s also advisable to seek professional advice from a qualified accountant, tax adviser or financial planner to ensure that you fully understand the tax implications of transferring a property into a limited company. Whichever professional you use you must ensure that he/she is a property taxation specialist. Ideally, you should work with a team comprising an accountant, a solicitor and a property taxation specialist. This is your power team. All of your professionals must have property taxation specialist knowledge and experience. You need all three to get it right. You know it makes sense*

*RISK WARNING

The Financial Conduct Authority does not regulate tax planning. The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this blog is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.

Tony Byrne

Chartered and Certified Financial Planner

Managing Director of Wealth and Tax Management

If you are looking for expert guidance in Financial Planning contact Wealth and Tax Management on 01908 523740 or email wealth@wealthandtax.co.uk